Incentives versus Transaction Costs: A Theory of Procurement Contracts

Rand Journal of Economics 32, no. 3 (Autumn 2001): 387-407
Incentives versus Transaction Costs: A Theory of Procurement Contracts
Patrick Bajari

Inspired by facts from the private-sector construction industry, we develop a model that explains many stylized facts of procurement contracts.

The buyer in our model incurs a cost of providing a comprehensive design and is faced with a tradeoff between providing incentives and reducing ex post transaction costs due to costly renegotiation. We show that cost-plus contracts are preferred to fixed-price contracts when a project is more complex.

We briefly discuss how fixed-price or cost-plus contracts might be preferred to other incentive contracts. Finally, our model provides some microfoundations for ideas from Transaction Cost Economics.

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Canary in the e-Commerce Coal Mine: Detecting and Predicting Poor Experiences Using Buyer-to-Seller Messages

Dimitriy Masterov, Uwe Mayer, Steve Tadelis

Reputation and feedback systems in online marketplaces are often biased, making it difficult to ascertain the quality of sellers. We use post-transaction, buyer-to-seller message traffic to detect signals of unsatisfactory transactions on eBay. We posit that a message sent after the item was paid for serves as a reliable indicator that the buyer may be unhappy with that purchase, particularly when the message included words associated with a negative experience. The fraction of a seller's message traffic that was negative predicts whether a buyer who transacts with this seller will stop purchasing on eBay, implying that platforms can use these messages as an additional signal of seller quality.